What is Indexed Universal Life Insurance?
IUL, or indexed universal life insurance, is a type of permanent life insurance policy that offers death benefit protection for your lifetime, as well as a cash value component that provides you with the opportunity for higher returns than regular universal life insurance yet without downside market risk.
What makes IUL different from other permanent life insurance policies is how interest is credited to the policy’s cash value portion. With IUL, in addition to having a declared interest rate, there is also the ability to earn a return that is linked to the movement of an underlying stock market index, such as the S&P 500.
Is IUL The Right Choice For You?
How The IUL Works
The way interest is credited to an IUL policy provides the potential for a higher return than t a whole life insurance policy or even regular universal life. For example, in years where the underlying index performs positively, your account will be credited with that return, up to a certain “cap.”
So, for example, if your policy has a simple cap of 7%, and the underlying index has a return of 8% in a given year, your cash value could be credited with 7%. However, in years where the underlying index performs negatively, your cash value account will be credited with a 0% return, therefore, protecting the principal and allowing you to continue building up your cash value without having to make up for any losses.
The funds inside your cash-value account are also allowed to grow on a tax-deferred basis. This means that there are no taxes due unless or until the money is withdrawn. This provides your cash-value account with the ability to grow and compound over time.
Because IUL is a permanent form of life insurance, you have the benefit of knowing that your loved ones are protected financially with the income-tax-free death benefit. Unlike term life insurance, IUL policies do not expire after a certain period. So, as long as you continue to pay the premium, this coverage will remain in force – even if an adverse health condition deems you as uninsurable in the future.
What are IUL insurance riders?
With a host of IUL riders present in the market, here is a list of the best:
- Accelerated Benefit Rider – a portion of benefits paid to cater to healthcare expenses.
- Adjustable Term Insurance Rider – increases a lump sum by integrating a term life policy.
- Additional Insured Rider – extends coverage to spouse or children
- Chronic Illness Rider – portion of benefits paid to offset costs of chronic illness
- Long-Term Care Rider – provides income to cater for long-term care expenses of a policyholder in a nursing home, home care, or assisted living facilities
